The average American home now costs in excess of $200,000, up 17 percent over a year ago. Part of the reason is that homes are getting bigger. People want more amenities such as bedrooms and bathrooms, and trimmings such as trophy kitchens, pillared driveway entrances, and recesses for statues. Consumers are able to pay for the houses because of low unemployment, stock market gains, and relatively low interest rates. This is not unusual¾house sizes generally increase during booms and contract in recessions. Another factor is that house buyers wish to have space in order to escape the pressures of city life. Better-insulated walls and tighter windows now make heating and cooling larger spaces more economical.

The other reason for the increase in price is that land, building materials and labor are more expensive. Cabinets are increasingly made out of relatively costly maple, rather than cheaper oak. Skilled labor is in short supply, but costs are reduced by making walls and ceilings in the factory and assembling them on the construction site. Facilitating the increase in the size of houses, stronger trusses are now available, alleviating the need to use walls as supports.

(Updated March 1, 2000)

Questions

1.

Draw a supply and demand diagram of the market for houses. Mark the equilibrium price and quantity a year ago.

a) Which determinant of demand have low unemployment and stock market gains affected? How has the demand curve moved as a result? Illustrate the effects on the equilibrium price and quantity of housing.

b) Which determinant of demand has the desire to escape the pressures of city life influenced? How has the demand curve shifted as a result? Show the additional effect on the equilibrium price and quantity of housing on your diagram.

c) Which determinant of demand has cheaper heating and cooling affected? How has the demand curve changed as a result? Illustrate the implications for the equilibrium price and quantity of housing on your diagram.

2.

Draw another supply and demand diagram of the market for houses. Mark the initial equilibrium.

a) Which determinant of supply has been affected by the higher cost of materials and labor? How has the supply curve moved as a result? Illustrate the consequences for the equilibrium price and quantity of housing on your diagram.

b) Which determinant of supply has been affected by stronger trusses? How has the supply curve shifted as a result? Show the implications for the equilibrium price and quantity of housing.

Source

Carlos Tejada and Patrick Barta, "Hey, Baby Boomers Need Their Space, OK? Look at All Their Stuff," The New York Times, January 7, 2000.